AbstractThis paper reports 45 laboratory duopoly markets that examine the importance of information sharing in facilitating tacit collusion under conditions of demand uncertainty. Sellers in these repeated laboratory markets generally shared information when possible to reduce their demand uncertainty, which led to output reductions in some demand states. Risk aversion is a likely explanation for this sharing, but some sellers also appeared to employ a strategy of information concealment to punish non-colluding rivals. Nevertheless, output choices were similar in control treatments that forced sellers to share or conceal information, so the information sharing itself did not substantially increase tacit collusion.

AbstractThis paper introduces the team dictator game to study how social dynamics between group members affects the incentives to exploit a powerful bargaining position. In the individual dictator game, a subject dictates the allocation of y dollars between herself and another subject; in the team dictator game, a team of two subjects dictates the allocation of 2y dollars between themselves and two other subjects. We derive and test competing predictions for the two dominant psychological theories of group polarization in the context of our team dictator experiment. We find support for Social Comparison Theory over Persuasive Argument Theory in this specific environment. We also present new tests for some existing explanations of subjects' behavior in the individual dictator game. In particular, we do not find that dictators are more generous when the number of people observing their choices increases.

AbstractThis paper introduces the sequential dictator game to study how social influence may affect subjects' choices when making dictator allocations. Subjects made dictator allocations of $40 before and after learning the allocation made by one other subject in the Relevant Information treatment, or the birthday of one other subject in the Irrelevant Information treatment. Subjects on average become more self-regarding in the Irrelevant Information treatment, but observing relevant information constrains some subjects from moving toward more self-regarding choices. We also find that subjects who exhibit more self-regarding behavior on their first decisions are less likely to change choices between their first and second decisions, and the use of the Strategy Method in this setting does not significantly alter choices. The relationships between our findings and the economic and psychological literature regarding how social influence operates are also explored.

AbstractThe paper examines participation decisions in EPA's 33/50 program to assess the potential for voluntary environmental regulation to achieve improvements in environmental performance. The 33/50 program is a major EPA initiative to reduce the releases and transfers of 17 high-priority toxic chemicals by 50 percent between 1988 and 1995. The results indicate that the program has the potential to obtain results because large firms with the greatest toxic releases are most likely to participate. The results also identify a demand-based participation incentive, since participation rates are higher in industries with greater consumer contact (proxied by advertising expenditures). This suggests that public recognition is a key element to improve the success of voluntary environmental regulation.

Do Community Characteristics Influence Environmental Outcomes? Evidence from the Toxics Release Inventory

AbstractThis research uses neighborhood characteristics (at the zipcode level) in 1990 to explain toxic releases in 1993. It combines the Toxics Release Inventory data with demographic data from the 1990 US Census. We first analyze the location of manufacturing facilities in a particular neighborhood using a sample selection model, and then estimate the relationship between releases in 1993 and the demographic characteristics of the neighborhood in 1990. We conduct the analysis for the entire US as well as for different geographic regions to study regional differences in determinants of environmental outcomes. Releases in the Southeastern US exhibit a pattern suggesting that race and gender characteristics might be important determinants of release patterns. Economic characteristics of neighborhoods (such as income levels and unemployment) also affect releases. We find no evidence that the propensity for communities to engage in political action influences environmental outcomes.

AbstractThis paper reports a laboratory experiment designed to examine the price formation process in a simple market institution, the single call market. The experiment features random values and costs each period, so each period generates a new price formation observation. Other design features are intended to enhance the predictive power of the Bayesian Nash Equilibrium (BNE) theory developed recently for this trading institution. We find that the data support several qualitative implications of the BNE, but that subjects' bid and ask behavior is not as responsive to changes in the pricing rule as the BNE predictions. Bids and asks tend to reveal more of the underlying values and costs than predicted, particularly when subjects are experienced. Nevertheless, observed trading efficiency falls below the BNE prediction. The results offer more support for the BNE when subjects compete against Nash "robot" opponents. A simple learning model accounts for several of the deviations from BNE.

A Laboratory Study of Voluntary Public Goods Provision with Imperfect Monitoring and Communication

AbstractThis paper reports seventeen laboratory sessions that introduce imperfect contribution monitoring in the voluntary contributions mechanism. In the imperfect monitoring treatment subjects learn others' public good contributions every six periods, and the experiment also includes face-to-face verbal communication as a treatment variable. The results demonstrate that improved contribution monitoring does not increase contributions without verbal communication, and that communication (even with imperfect monitoring) dramatically improves subjects' ability to efficiently provide the public good. The results have implications for the design of development programs that feature a prominent role for collective action.

AbstractThis paper compares the performance of four different trading institutions in laboratory markets. Two institutions, the continuous double auction and the single call market, are commonly employed on organized exchanges. Two other "hybrid" institutions, the uniform price double auction and multiple call market, link the other institutions in different dimensions. The laboratory environment features four buyers and four sellers who receive random values and costs in each period and who have a one-unit trading capacity. Therefore, each period provides an observation of price formation and exchange in a thin market environment. We find that trading efficiency is lowest in the institutions that permit only one transaction opportunity each period, primarily due to insufficient trading volume. However, the institutions that permit a single trading opportunity force all traders to transact at a uniform price, which tends to generate prices that more accurately reflect underlying market conditions.

AbstractWe propose a simple adaptive learning model to study behavior in the single call market. The laboratory environment features buyers and sellers who receive a new random value or cost in each period, so they must learn a strategy that maps these random draws into bids or asks. We focus on buyers’ adjustment of the "mark-down" ratio of bids relative to private value and sellers’ adjustment of the corresponding "mark-up" ratio of asks relative to private cost. The learning model involves partial adjustment of these ratios towards the ex post optimum each period. The model explains a substantial proportion of the variation in traders’ strategies. Parameter estimates indicate strong recency effects and negligible autonomous trend, but strongly asymmetric response to different kinds of ex post error. The asymmetry is only slightly attenuated in "observational learning" from other traders’ ex post errors. Simulations show that the model can account for the main systematic deviations from equilibrium predictions observed in this market institution and environment.

The Opportunity for Conspiracy in Asset Markets Organized with Dealer Intermediaries

AbstractThis paper reports an asset market experiment in which asymmetrically informed traders transact through competing dealers, who continuously post bid and ask quotes that traders can accept. Dealers face a classic adverse selection problem when pricing the asset, because one set of traders has private information regarding the asset value while another set of traders is uninformed and must satisfy an exogenous liquidity demand. With no non-market communication between subjects, dealers price the asset competitively and the market is informationally efficient in most sessions. When dealers communicate privately between periods, in most sessions they successfully collude to widen spreads and increase profit. Another treatment permits traders to post limit orders, while still allowing dealers to communicate. Limit orders restore informational efficiency and narrow spreads, but cause dealers to earn negative trading profits.

byTimothy N. CasonUniversity of Southern CaliforniaandLata GangadharanUniversity of Melbourne(Published in the Journal of Regulatory Economics, 1998)Draft: August 1997

AbstractThis paper reports a laboratory experiment that studies several specific features of the Regional Clean Air Incentives Market (RECLAIM), a tradable emission permit program intended to lower the cost of meeting federal air quality standards in the Los Angeles area. It assesses the impact of some permit trading rules and alternative regulatory policies on market performance. The experiment focuses on a new centralized system of trading called the Electronic Bulletin Board Market. In this trading institution firms wanting to buy and sell permits can publicly post basic information about their requirements and proposed terms of trade, and potential trading partners can review this information online. Transactions are executed following bilateral negotiation. We compare the performance of this institution with the continuous double auction (CDA) trading institution. The environment implemented in the experiment includes specific trading restrictions implemented in RECLAIM due to the geography of the Los Angeles area. We find that the bulletin board market performs well and prices reflect market conditions as accurately as in the CDA. These results suggest that reliance on the electronic bulletin board market will not lead to inaccurate transaction prices.

AbstractWe conduct a two-stage game experiment with a non-excludable public good. In the first stage, two subjects choose simultaneously whether or not they commit to contributing nothing to provide a pure public good. In the second stage, knowing the other subject's commitment decision, subjects who did not to commit in the first stage choose contributions to the public good. We found no support for the evolutionary stable strategy equilibrium, and the ratio of subjects who did not commit to contributing nothing increased as periods advanced; that is, the free-riding rate declined over time. Furthermore, this behavior did not arise due to altruism or kindness among subjects, but from spiteful behavior of subjects.

Voluntary Participation and Spite in Public Good Provision Experiments: An International Comparison

AbstractThis paper studies public good provision in the laboratory using the voluntary contribution mechanism, in a cross-cultural experiment conducted in the United States and Japan. Our environment differs from the standard voluntary contribution mechanism because in one treatment, subjects first decide whether or not to participate in providing this public good. This participation decision is conveyed to the other subject prior to the subjects’ contribution decisions. We find that only the American data support the evolutionary stable strategy Nash equilibrium predictions, and that behavior is significantly different across countries. Japanese subjects are more likely to act spitefully in the early periods of the experiment, even though our design changes subject pairings each period so that subjects never interact twice with the same opponent. Surprisingly, this spiteful behavior eventually leads to more efficient public good contributions for Japanese subjects than for American subjects.

Fairness and Sharing in Innovation Games: A Laboratory Investigation

byTimothy N. CasonPurdue UniversityandVai-Lam MuiUniversity of Notre Dame(Published in the Journal of Economic Behavior and Organization, 2002) Draft: April 2000

AbstractThis paper studies whether psychological considerations can exacerbate distributional conflicts and prevent agents from adopting innovations that are potential Pareto improvements. In the innovation game without the sharing option, a participant A subject chooses whether to introduce an innovation that increases A's payoff, but reduces B's payoff, relative to the "status quo" payoff of each participant. If A innovates, B then decides whether to accept or reject the innovation. In all payoff treatments, (innovate, accept) is the unique subgame perfect equilibrium if both participants are only concerned with maximizing their pecuniary payoffs. We find that this outcome is observed less than one-half of the time overall when the sharing option is not available. A participants only innovate about 75 percent of the time, and B participants reject the innovation nearly 40 percent of the time. In the innovation game with the sharing option, A has the additional option to invest resources to share his gain from the innovation with B. We find that the availability of the sharing option increases the rate at which participant A subjects innovate in one of the two payoff treatments.

AbstractPosted offer markets with costly buyer search are investigated in 18 laboratory sessions. Each period sellers simultaneously post prices. Then each buyer costlessly observes one or two of the posted prices and either accepts an observed price, drops out, or pays a cost to search again that period. The sessions vary the number of observed prices (one or two), the search cost, and the number and kind of buyers. When there are more buyers (especially robot buyers), observed transaction prices conform remarkably closely to theory (competitive Bertrand prices when buyers observe two prices and monopoly Diamond prices when buyers observe only one price). With human subject buyers we observe less extreme prices, but outcomes are closer to theory than outcomes in previous laboratory experiments with similar environments.

byTimothy N. CasonPurdue UniversityandTridib SharmaITAM(Published in Journal of Political Economy, 2001)Draft: November 2000

AbstractThis paper presents a model in which a durable goods monopolist sells a product to two buyers. Each buyer is privately informed about his own valuation. Thus all players are imperfectly informed about market demand. We study the monopolist's pricing behavior as players' uncertainty regarding demand vanishes in the limit. In the limit, players are perfectly informed about the downward sloping demand. We show that in all games belonging to a fixed and open neighborhood of the limit game there exists a generically unique equilibrium outcome which exhibits Coasian dynamics and where play lasts for at most two periods. A laboratory experiment shows that, consistent with our theory, outcomes in the Certain and Uncertain Demand treatments are the same. Median opening prices in both treatments are roughly at the level predicted and considerably below the monopoly price. Consistent with Coasian dynamics, these prices are lower for higher discount factors. Demand withholding, however, leads to more trading periods than predicted.

AbstractSurvey evidence suggests that consumers care about the environment and are willing to pay a higher price for a product that generates less environmental harm. We induce buyer preferences over quality in a laboratory posted offer market to study sellers' incentives to offer products of differing quality. Buyers are unaware of the product quality before purchase, as is often the case for goods with differing environmental quality. We first document the market failure that arises from incomplete information when no signaling or reputations are possible. We then study various treatments that could remedy this failure. Seller reputations and unverified "cheap talk" signals sometimes increase the number of higher-valued 'green' goods. The only reliable way to improve product quality in the experiment, however, is to use a third party that charges a fee to certify product quality claims.

AbstractIn our laboratory customer markets, sellers post price and buyers incur cost (controlled at zero, low and high values) when they switch to a new seller. Sellers’ induced costs follow various random walks in 28 sessions, each with 50-100 trading periods. We find that prices are sticky, and sellers absorb almost half of their cost shocks. Sellers price about 10 percent higher when buyers face either high or low switch costs, and trading efficiency is slightly impaired. Experienced buyers switch about 10 percent of the time with either high or low switch costs. Buyers switch more often when they face a higher posted price, have a lower valuation for the good, face lower switch costs, have more time remaining, and have more favorable information on alternative prices. Sellers price higher when they have more attached buyers, when buyers have less information on rivals’ prices, when rivals post higher prices, and when less time remains.

Buyer Search and Price Dispersion: A Laboratory Study(or click here for the longer, July 2000 version)

AbstractWe study posted offer markets with costly buyer search in 18 laboratory sessions. Each period sellers simultaneously post prices. Then each buyer costlessly observes one or (with probability 1-q) two of the posted prices, and either accepts an observed price, drops out, or pays a cost to search again that period. The sessions vary q, the search cost, and the number and kind of buyers. Equilibrium theory predicts a unified very low (very high) price for q=0 (q=1) and predicts specific distributions of dispersed prices for q=1/3 and 2/3. Actual transaction prices conform rather closely to the predictions, especially in treatments with many robot buyers. Buyers' reservation prices are biased away from the extremes, however, and sellers' posted prices have positive autocorrelation and cross sectional correlation.

To Spin or Not To Spin? Natural and Laboratory Experiments from The Price is Right

AbstractThe Wheel is a sequential game of perfect information played twice during each taping of the television game show The Price is Right. This game has simple rules and the stakes are high. We derive the unique subgame perfect Nash equilibrium (USPNE) for The Wheel and test its predictive ability using data from both the television show and laboratory plays of this game. We find that contestants frequently deviate from the USPNE when the decisions are difficult. The pattern of these deviations is (a) largely independent of the stakes of the game, and (b) is consistent with a psychological bias of the omission-commission type.

byTimothy N. CasonPurdue UniversityandLata GangadharanUniversity of Melbourne(Published in the Journal of Regulatory Economics, 2003)Draft: December 2000

AbstractIn recent years many countries have considered and some have adopted incentive approaches for environmental regulation, such as tradable permit schemes to control pollution. In this paper we use laboratory experiments to study the design features of tradable permit programs, focusing on the transaction costs incurred by participants. In the absence of transaction costs, in a competitive market the initial distribution of permits affects equity but has no impact on the efficiency of final allocations. In the presence of transaction costs, however, even in a competitive market the initial distribution of permits can affect both efficiency and equity. We study treatments in which marginal transaction costs are zero, constant and declining. Traders transact through the continuous double auction institution. Our results show that consistent with theory, when marginal transaction costs are declining prices deviate less from the competitive equilibrium if the “misallocation” of the initial permit distribution is greater. The deviation from the zero transaction cost competitive equilibrium does not vary with the initial permit endowment when marginal transaction costs are constant.

Bargaining versus Posted Price Competition in Customer Markets

byTimothy N. CasonPurdue UniversityandDan Friedman and Garrett MilamUniversity of California at Santa Cruz(Published in International Journal of Industrial Organization, 2003)Draft: October 2001

AbstractThis paper reports a preliminary laboratory experiment in which traders make investments to increase the reliability of tradable instruments that represent greenhouse gas emissions allowances. In one half of the sessions these investments are unobservable, while in the other half traders can invite costless and accurate inspections that make reliability investments public. We implement a buyer liability rule, so that if emissions reductions are unreliable (i.e., sellers default), the buyer of the allowances cannot redeem them to cover emissions. We find that allowing inspections significantly increases the reliability investment rate and overall efficiency. Prices of uninspected allowances usually trade at a substantial discount due to the buyer liability rule, which provides a strong market incentive for sellers to invest in reliability.

AbstractThis paper reports an experiment on two-player sequential bargaining with asymmetric information. The experimental design is simple enough to permit computation of predictions of models of bounded rationality and/or learning, yet rich enough to capture the forces at work in multi-round monopoly pricing environments. Buyer-seller pairs play a series of bargaining games that last for either one or two rounds of offers. The treatment variable is the probability of continuing into a second round. Data from four different continuation probabilities are used to test equilibrium predictions. We also consider quantal response equilibrium (QRE) to capture bounded rationality of subjects, and this approach captures many of the important features of the results.

Uncertainty and Resistance to Reform in Laboratory Participation Games

byTimothy N. CasonPurdue UniversityandVai-Lam MuiUniversity of Notre Dame(Published in European Journal of Political Economy, 2005)Draft: December 2004

AbstractThis paper presents a participation game experiment to study the impact of uncertainty on the incidence of reform in the presence of both inter- and intra-group conflicts. Fernandez and Rodrik (1991) show that uncertainty about who will ultimately gain or lose as a result of a reform can prevent its adoption. We introduce intra-group conflict into this framework by incorporating costly political participation. Costly political participation creates a natural incentive for free-riding on fellow group members’ efforts to influence policy outcomes. An agent, however, may still be willing to participate if her participation is likely to affect the policy outcome given the probabilities of participation by others. Our experimental findings show that uncertainty reduces the incidence of reform even with costly political participation, and that an increase in the cost of political participation reduces the participation of all agents, regardless of whether they belong to the majority and minority. This second result cannot be reconciled with the standard mixed strategy Nash equilibrium, but is consistent with the quantal response equilibrium.

A Laboratory Study of Auctions for Reducing Non-Point Source Pollution

AbstractNon-point source pollution, such as nutrient runoff to waterways from agricultural production, is an environmental problem that typically involves asymmetric information. Land use changes to reduce pollution incur opportunity costs that are privately known to landholders, but these changes provide environmental benefits that may be more accurately estimated by regulators. This paper reports a testbed laboratory experiment in which landholder/sellers in multi-round, sealed-offer auctions compete to obtain part of a fixed budget allocated by the regulator to subsidize pollution abatement. In one treatment the regulator reveals to landholders the environmental benefits estimated for their alternative projects, and in another treatment the regulator conceals the potential projects’ “environmental quality.” The results show that sellers’ offers misrepresent their costs more for high quality projects when quality is revealed, so total abatement is lower and seller profits are higher when landholders know their projects’ environmental benefits. This suggests that concealing this information may improve regulatory efficiency.

AbstractIn theory, competitive emission permit markets minimise total abatement cost for any emission ceiling. Permit markets are often imperfectly competitive, however, if they are thin and dominated by large firms. The dominant firm(s) could exercise market power and increase other firms’ costs of pollution control, while reducing their own emission control costs. This paper reports a testbed laboratory experiment to examine whether a dominant firm can exercise market power in a permit market organised using the double auction trading institution. Our parameters approximate the abatement costs of sources in a proposed tradable emissions market for the reduction of nitrogen in the Port Phillip Watershed in Victoria, Australia. We vary across treatments the initial (pre-trade) allocation of permits to sources, so that in one treatment the seller of permits is a monopolist and in another treatment the selling side of the market is duopolistic. We also vary the information that subjects have about the number and abatement costs of their competitors. We find that prices and seller profits are higher and efficiency is lower on average in the monopoly sessions compared to the duopoly sessions, but the differences are not substantial and are not statistically significant due to pronounced variation across sessions. Moreover, prices, profits and transaction volumes are usually much closer to the competitive equilibrium than the monopoly equilibrium.

AbstractHypotheses on the dynamics of dispersed prices are extracted from computer simulations, as well as traditional and recent theory. The hypotheses are tested on existing laboratory data. As predicted in some variations of the Edgeworth hypothesis, the laboratory data exhibit a significant cycle. Relative to the unique stationary distribution, the empirical distribution of posted prices has excess mass in an interval that moves downward over time until it approaches the lower boundary of the stationary distribution. Then the excess mass jumps upward and the downward cycle resumes. The amplitude of the cycle seems fairly constant over the longer experimental sessions. Of the simulations we consider, the one closest to Edgeworth’s 1925 account, a hybrid of gradient dynamics and logit dynamics, seems to best reproduce the observed dynamics.

AbstractWe construct a laboratory market with the structure studied by Burdett, Shi, and Wright (2001). The model is a simple and natural way to represent a market in which there is a friction in the matching process between buyers and sellers. Sellers first simultaneously post prices at which they are willing to sell their single unit of a good. Buyers then simultaneously choose a seller, from whom to attempt to purchase a unit. If more than one buyer chooses the same seller, the good is randomly sold to one of the buyers. If a seller is not chosen by any buyer, his unit is not sold. Our experimental results show a broad consistency with the model of Burdett et al. and less support for an alternative model, which is analogous to Montgomery (1991), which has different assumptions on the strategic interaction between sellers. The main departure that we observe from the Burdett et al. model is that prices exceed the equilibrium level when there are only two sellers.

AbstractStrategy-proofness, requiring that truth-telling is a dominant strategy, is a standard concept used in social choice theory. Saijo et al. (2003) argue that this concept has serious drawbacks. In particular, announcing one's true preference may not be a unique dominant strategy, and almost all strategy-proof mechanisms have a continuum of Nash equilibria. For only a subset of strategy-proof mechanisms do the set of Nash equilibria and the set of dominant strategy equilibria coincide. For example, this double coincidence occurs in the Groves mechanism when preferences are single-peaked. We report experiments using two strategy-proof mechanisms where one of them has a large number of Nash equilibria, but the other has a unique Nash equilibrium. We found clear differences in the rate of dominant strategy play between the two.

byTimothy N. CasonPurdue UniversityandLata GangadharanUniversity of Melbourne(Published in Land Economics, 2005)Draft: May 2003

AbstractLand use changes to reduce non-point source pollution, such as nutrient runoff to waterways from agricultural production, incur opportunity costs that are privately known to landholders. Auctions may permit the regulator to identify those management changes that have greater environmental benefit and lower opportunity cost. This paper reports a testbed laboratory experiment in which landowner/sellers compete in sealed-offer auctions to obtain part of a fixed budget allocated by the regulator to subsidize pollution abatement. One treatment employs uniform price auction rules in which the price is set at the lowest price per unit of environmental benefits submitted by a seller who had all of her offers rejected, so sellers have an incentive to offer their projects at cost. Another treatment employs discriminative price rules that are not incentive compatible, because successful sellers receive their offer price. Our results indicate that subjects recognize the cost-revelation incentives of the uniform price auction as a majority of offers are within 3 percent of cost. By contrast, a majority of offers in the discriminative price auction are at least 10 percent greater than cost. But the regulator spends more per unit of environmental benefit in the uniform price auction, and the discriminative price auction has superior overall market performance.

An Experimental Study of Compliance and Leverage in Auditing and Regulatory Enforcement

AbstractEvidence suggests that a large majority of firms and individuals comply with regulations and tax laws even though the frequency of inspections and audits is often low. Moreover, fines for noncompliance are also typically low when regulatory violations are discovered. These observations are not consistent with static compliance models. Harrington (1988) modified these static models by specifying a dynamic game in which some agents have an incentive to comply even when the cost of compliance each period is greater than the expected penalty. This paper reports a laboratory experiment based on the Harrington model framework, in which subjects move between two inspection groups that differ in the probability of inspection and severity of fine. Subjects decide to comply or not in the presence of low, medium or high compliance costs. Enforcement leverage arises in the Harrington model from movement between the inspection groups based on previous observed compliance and noncompliance. Our results indicate that consistent with the model, violation rates increase when compliance costs become higher and as the probability of switching groups becomes lower. Behavior does not change as sharply as the model predicts, however, since violation rates do not jump from 0 to 1 as parameters vary across critical thresholds. A simple model of bounded rationality explains these deviations from optimal behavior.

AbstractUnexpected variation in emissions can have a substantial impact on the prices and efficiency of tradable emission permit markets. In this paper we report results from a laboratory experiment in which subjects participate in an emissions trading market in the presence of emissions uncertainty. Subjects face exogenous, random positive or negative shocks to their emission levels after they make production and emission control plans. In some sessions we allow subjects to bank their unused permits for future use. In all sessions, subjects can trade in a reconciliation period to buy or sell extra permits following the shock realization. Subjects then report their emissions to the regulatory authority and they are placed in different inspection groups depending on their compliance history. The design of our experiment allows us to identify important interactions between emission shocks, banking, compliance and enforcement. We find that the relationship between emission shocks and price changes is significantly stronger without banking, so banking helps smooth out the price variability arising from the imperfect control of emissions. This greater price stability comes at a cost, however, since noncompliance and emissions are significantly greater when banking is allowed.

Forced Information Disclosure and the Fallacy of Transparency in Markets

AbstractThe research addresses a widely held belief among regulators that any additional information about the objectives and intentions of one side of a market made available to other market participants will improve market performance. The belief is about the principles of market behavior in general in that the coordination of exchange will be better facilitated by any such information revelation and both sides will be better off. The experiment reported here is specifically motivated by regulatory hearings before the California Public Utility Commission on the California wholesale electricity market. Electricity suppliers argue that the California public would pay lower prices if the market demand by the major (public utility) buyers is known to sellers. The markets studied are in the form of decentralized, privately negotiated contracts, typical of the wholesale electricity markets. The experiment demonstrates that such markets generally converge to the competitive equilibrium. However, forced disclosure of demand works to the disadvantage of the disclosing side of the market. If the principles of market adjustment observed in the laboratory are also operating in the California wholesale electricity market, the proposed regulation forcing such disclosure would result in higher electricity prices for the consuming California public.

An Experimental Study of Price Dispersion in an Optimal Search Model with Advertising

byTimothy N. CasonPurdue UniversityandShakun DattaPurdue University

(Published in International Journal of Industrial Organization, 2006)Draft: August 2005

AbstractThis paper reports a laboratory experiment to study pricing and advertising behavior in a market with costly buyer search. Sellers simultaneously post prices and decide whether or not to incur an exogenous cost to advertise this price. Sellers are not capacity constrained, and each buyer demands one unit per period. In the unique symmetric equilibrium, sellers either charge a high unadvertised price or randomize in an interval of lower advertised prices. Theory predicts that increases in either search or advertising costs raise equilibrium prices, and that equilibrium advertising intensity decreases with lower search costs and higher advertising costs. To test the predictions regarding the level and dispersion of prices and advertising intensity, we vary the costs of search and advertising across different experimental treatments. Our results support the model’s comparative static predictions, and sellers also post high unadvertised prices as predicted. In all treatments, however, sellers advertise more intensely than in equilibrium.

Costly Buyer Search in Laboratory Markets with Seller Advertising

byTimothy N. CasonPurdue UniversityandShakun DattaPurdue University

(Published in Journal of Industrial Economics, 2010)Draft: March 2007

AbstractIn this laboratory experiment sellers simultaneously post prices and choose whether to advertise this price. Buyers then decide whether to buy from a seller whose advertisement they have received, or engage in costly sequential search to obtain price quotes from other sellers. In the unique symmetric equilibrium, sellers either charge a high unadvertised price or randomize in an interval of lower advertised prices Increases in either search or advertising costs raise equilibrium prices, and equilibrium advertising intensity decreases with lower search costs and higher advertising costs. Our results support most of the model’s comparative static predictions, and sellers also post lower advertised than unadvertised prices as predicted. In all treatments, however, sellers price much lower than the equilibrium price interval and earn very low profits. Buyers’ search decisions are approximately optimal, but sellers advertise more intensely than predicted. Consequently, market outcomes more closely resemble a perfect information, Bertrand-like equilibrium than the imperfect information, mixed strategy equilibrium that features significant seller market power.

AbstractThis study reports a laboratory experiment wherein subjects play a hawk-dove game. We try to induce players to play a correlated equilibrium with payoffs outside the convex hull of Nash equilibrium payoffs by privately recommending play to each subject. We find that subjects are reluctant to follow certain recommendations. We are able to implement this correlated equilibrium, however, when subjects play against robots that always follow recommendations. The same is true in a control treatment in which the robot "earnings" are transferred to human subjects. This indicates that the lack of mutual knowledge of conjectures, rather than social preferences, explains subjects' failure to play the suggested correlated equilibrium when facing other human players.

A Test Bed Experiment for Water and Salinity Rights Trading in Irrigation Regions of the Murray Darling Basin, Australia

AbstractThe Murray Darling Basin, located in Eastern Australia, accounts for 14% of Australia’s total land area, and supports 71% of Australia’s irrigated agricultural production. Irrigated agriculture contributes an estimated 20-25% of Australia’s gross value of agricultural output, but irrigation has a significant negative impact on the environment. Removal of native vegetation and the application of irrigation water to agricultural crops has resulted in rising groundwater and increased salt concentrations in rivers and streams. This paper reports a pilot test bed experiment implemented to explore the operation of simultaneous double auctions for water and salinity rights in the Murray River. The experimental parameters approximate field conditions for one of the Basin’s large irrigation regions located in northern Victoria and called The Sunraysia. In the first treatment, irrigators trade water rights in a manner similar to the emerging electronic water markets in the Basin. In the second treatment we introduce a salinity market where irrigators must purchase salinity rights to account for the environmental impact of their water use. In a third treatment we introduce endogenous technological change to represent private abatement in the salinity market. We examine whether these simultaneous markets can efficiently allocate salinity, abatement and water rights between irrigators. This research would inform the Commonwealth of Australia in its national initiative to improve environmental quality across the Murray Darling Basin.

Communication and Coordination in the Collective Resistance Game

byTimothy N. CasonPurdue UniversityandVai-Lam MuiMonash University

(Published in Experimental Economics, 2007)Draft: April 2006

AbstractThis paper presents a laboratory collective resistance (CR) game to study how different forms of non-binding communication among subordinates can help coordinate their collective resistance against a leader who transgresses against their rights. Contrary to the predictions of analysis based on purely self-regarding preferences, we find that non-binding communication about intended resistance increases the incidence of no transgression even in the one-shot laboratory CR game. In particular, we find that the incidence of no transgression increases from 7 percent with no communication to 16-37 percent depending on whether communication occurs before or after the leader’s transgression decision. Subordinates’ messages are different when the leaders can observe them, and the leaders also appear to use the observed messages to target specific subordinates for transgression.

Moral Hazard and Peer Monitoring in a Laboratory Microfinance Experiment

(Published in Journal of Economic Behavior and Organization, 2012)Draft: August 2009

AbstractThis paper reports the results from a laboratory microfinance experiment of group lending in the presence of moral hazard and (costly) peer monitoring. We compare peer monitoring treatments when credit is provided to members of the group to individual lending with lender monitoring. The results depend on the relative costs of monitoring by the peer vis-à-vis the lender. If the cost of peer monitoring is lower than the cost of lender monitoring, peer monitoring results in higher loan frequencies, higher monitoring and higher repayment rates compared to lender monitoring. In the absence of monitoring cost differences, however, performance is mostly similar across group and individual lending schemes. Within group lending, simultaneous and sequential lending provide equivalent empirical performance.

Explicit versus Implicit Contracts for Dividing the Benefits of Cooperation

AbstractExplicit contracts are used most frequently by theorists to model many relationships, ranging from labor markets to investment projects. Experimental evidence has accumulated recently highlighting the limitations of formal and explicit contracts in certain situations, and has documented environments in which informal and implicit contracts are more efficient. This paper compares the performance of explicit and implicit contracts in a new partnership environment in which both contracting parties must incur effort to generate a joint surplus, and one (“strong”) agent controls the surplus division. In the treatment in which the strong agent makes a non-binding “bonus” offer to the weak agent, this unenforceable promise doubles the rate of joint high effort compared to a baseline with no promise. The strong agents most frequently offered a bonus to split the gains of the high effort equally, but actually delivered this bonus amount only about one-quarter of the time. An explicit and enforceable contract offer performs substantially better, however, raising the rate of the most efficient outcome by over 200 percent relative to the baseline. Very low and high offers helped agents coordinate on the low effort equilibrium.

AbstractThe paper presents a complete information model of bidding in second price sealed-bid and ascending-bid (English) auctions, in which potential buyers know the unit valuation of other bidders and may spitefully prefer that their rivals earn a lower surplus. Bidders with spiteful preferences should overbid in equilibrium when they know their rival has a higher value than their own, and bidders with a higher value underbid to reciprocate the spiteful overbidding of the lower value bidders. The model also predicts different bidding behavior in second price as compared to ascending-bid auctions. The paper also presents experimental evidence broadly consistent with the model. In the complete information environment, lower value bidders overbid more than higher value bidders, and they overbid more frequently in the second price auction than in the ascending price auction. Overall, the lower value bidder submits bids that exceed value about half the time. These patterns are not found in the incomplete information environment, consistent with the model.

AbstractOrganizational and political leaders often engage in “divide-and-conquer” transgression, in which a leader extracts surplus from avictim and shares it with a beneficiary to gain the latter’s support for his transgression. This paper conducts the first experimental study to evaluate how repeated interactions with and without communication between “responders” can coordinate their resistance towards divide-and-conquer transgressions. It also investigates theoretically and empirically how social preferences can affect successful resistance against divide-and-conquer transgressions with repetition. In our experiment, repetition without communication reduces the transgression rate. Joint resistance is more common in early rounds of a supergame when players have more uncertainty about social preference types, and leaders target beneficiaries who resist transgression. We also find that repetition alone is only as effective as cheap talk communication in the one-shot game in reducing transgression. Our findings suggest that the risk associated with cooperation can impose a limit on the effectiveness of repeated interaction in facilitating cooperation in this repeated Coordinated Resistance game.

AbstractThe study provides a unified theoretical and experimental framework in which to compare three canonical types of competition: winner-take-all contests won by the best performer, winner-take-all lotteries where probability of success is proportional to performance, and proportional-prize contests in which rewards are shared in proportion to performance. We introduce random noise to reflect imperfect information, and collect independent measures of risk aversion, other-regarding preferences, and the utility of winning a contest. The main finding is that efforts are consistently higher with winner-take-all contests. The lottery contests have the same Nash equilibrium as proportional prizes, but induce contestants to choose higher efforts and receive lower, more unequal payoffs. This result may explain why contest designers who seek only to elicit effort offer lump-sum prizes, even though contestants would be better off with proportional rewards.

Entry into Winner-Take-All and Proportional-Prize Contests: An Experimental Study

AbstractThis experiment compares the performance of two contest designs. In a winner-take-all tournament, the highest performing contestant wins a prize. In the proportional-payment design, that same prize is divided among the contestants according to their share of total output. We find that proportional prizes elicit higher entry rates and thus more total achievement than the winner-take-all tournament. The proportional-prize contest performs better because it encourages significantly more entry among low ability contestants, without discouraging the entry of high ability contestants or limiting entrants’ performance. Proportional prizes also reduce excess entry due to overconfidence. Consistent with previous literature, we find that men enter tournaments more often than women.

Can Real-Effort Investments Inhibit the Convergence of Experimental Markets?

(Published in International Journal of Industrial Organization, 2011)Draft: February 2009

AbstractThis paper investigates whether investments in effort that affect the allocation of production costs but not market supply can inhibit equilibrium convergence of experimental markets. In the main treatment, sellers participate in a real-effort game. Their relative performance in the game and a random productivity shock determine their production costs. Despite using a design that increases the likelihood that effort investments trigger concerns about fairness, we find that prices converge to equilibrium predictions at rates similar to those in a treatment where production costs are randomly allocated. Efficiency rates are high and do not differ across treatments. Interestingly, buyers exhibit a preference for buying from sellers that have higher costs.

Testing the TASP: An Experimental Investigation of Learning in Games with Unstable Equilibria

AbstractWe report experiments designed to test between Nash equilibria that are stable and unstable under learning. The “TASP” (Time Average of the Shapley Polygon) gives a precise prediction about what happens when there is divergence from equilibrium under a wide class of learning processes. We study two versions of Rock-Paper-Scissors with the addition of a fourth strategy, Dumb. The unique Nash equilibrium places a weight of 1/2 on Dumb in both games, but in one game the NE is stable, while in the other game the NE is unstable and the TASP places zero weight on Dumb. We also vary the level of monetary payoffs, with higher payoffs predicted to increase instability. Consistent with the comparative statics prediction of TASP, we find that the frequency of Dumb is lower and play is further from Nash in the high payoff unstable treatment than in the other treatments. However, the frequency of Dumb is substantially greater than zero in the unstable treatments

AbstractMotivated by problems of coordination failure observed in weak-link games, we experimentally investigate behavioral spillovers for order-statistic coordination games. Subjects play the minimum- and median-effort coordination games, which have multiple pure strategy Pareto-ranked equilibria. We examine a treatment where groups participate in a minimum game followed by a median game, a treatment where groups participate in a median game followed by a minimum game, and a treatment where groups participate in both games simultaneously. Efficient coordination is usually attained in the median game, so participation in this game creates a precedent for cooperative behavior. On the other hand, less coordination occurs in the minimum game, so participation in this game creates a precedent for uncooperative behavior. We find that the precedent for cooperative behavior spills over from the median game to the minimum game, and this effect is significant when the games are played sequentially. We also find that the precedent for uncooperative behavior does not spill over from the minimum game to the median game. These findings suggest guidelines for increasing cooperative behavior within organizations.

AbstractCostless pre-play communication has been found to effectively facilitate coordination and enhance efficiency in games with Pareto-ranked equilibria. We report an experiment in which two groups compete in a weakest-link contest by expending costly efforts. Allowing intra-group communication leads to more aggressive competition and greater coordination than control treatments without any communication. On the other hand, allowing inter-group communication leads to less destructive competition. As a result, intra-group communication decreases while inter-group communication increases payoffs. Our experiment thus provides evidence that communication can either reduce or increase efficiency in competitive coordination games depending on different communication boundaries. This contrasts sharply with experimental findings from public goods and other coordination games, where communication always enhances efficiency and often leads to socially optimal outcomes.

AbstractEarly emissions trading programs obtained a very high rate of compliance, in part through a system of continuous emissions monitoring systems (CEMS). As they expand into a wider range of pollutants and sources, however, emissions trading programs will no longer be able to rely entirely, or even primarily, on CEMS. Instead, policy designers will have to rely on different forms of self-reporting, as was done in the early stages of the EU Emissions Trading System and as is common in many other forms of environmental and regulatory compliance, including taxation policy. The cost of verifying these self-reports is an important concern, one directly related to the likelihood of non-compliance. This paper asks if by improving “affirmative motivations” (Tyler 2006; May 2005) for compliance among emitters, such policies could reduce under-reporting and thus the frequency of required audits to verify self-reported emissions information, thereby reducing program costs without unduly jeopardizing environmental integrity. Using a computerized laboratory emissions trading market, we find that many subjects reported honestly in situations where dishonest reporting was obviously more profitable, as well as a statistically significant association between perceptions of a policy’s fairness and legitimacy with more honest levels of emissions reporting. These results suggest that designing an emissions trading program to increase its perceived legitimacy and fairness among users has the potential to increase honest emissions reporting and thereby lower monitoring costs for programs where continuous emissions monitors (CEMS) are not possible or practical.

An Experimental Study of Information Revelation Policies in Sequential Auctions

AbstractTheoretical models of information asymmetry have identified a tradeoff between the desire to learn and the desire to prevent an opponent from learning private information. This paper reports a laboratory experiment that investigates if actual bidders account for this tradeoff, using a sequential procurement auction with private cost information and varying information revelation policies. Specifically, the Complete Information Policy, where all submitted bids are revealed between auctions, is compared against the Incomplete Information Policy, where only the winning bid is revealed. The experimental results are largely consistent with the theoretical predictions. For example, bidders pool with other types to prevent an opponent from learning significantly more often under a Complete Information Policy. Also as predicted, the procurer pays less when employing an Incomplete Information Policy only when suppliers' cost structures are highly competitive. Observed deviations from the quantitative theoretical predictions appear to be consistent with risk aversion and bounded rationality.

AbstractThis paper studies whether players who have successfully used a specific efficiency-enhancing repeated game strategy will teach other players in subsequent supergames to adopt this strategy. We conduct a laboratory experiment on the repeated common-pool resource assignment game, in which there are two focal equilibria: one in which each player always chooses the stage-game dominant strategy, and a more efficient one in which the players engage in turn taking that requires intertemporal coordination. Each subject in the experiment plays the same indefinitely repeated game seven times, with a different opponent in each supergame. The experiment also manipulates the degree of conflict in the stage game as a treatment variable. We find that subjects engage in turn taking frequently in both the Low Conflict and the High Conflict treatments, but turn taking is more common in the Low Conflict treatment. Prior experience with turn taking significantly increases turn taking in both treatments. Moreover, successful turn taking often involves fast learning, and individuals with turn taking experience are more likely to be teachers than inexperienced individuals.

AbstractMany new and proposed emissions trading systems involve multiple countries and regions. The introduction of interregional trading raises questions about how flexible state- or national-level authorities should be in allowing individual firms to trade with firms or authorities in other states or countries. This paper uses laboratory methods to evaluate the efficiency and pricing performance of linking trading across regions at the firm-to-firm level. In one treatment, individual firms trade directly with firms or authorities in other regions. We compare performance in this treatment with an intergovernmental trading treatment, where emissions trading is restricted to occur only between intermediaries. A baseline treatment of autarky, where firms only trade with other firms in their country or region, provides a benchmark to assess the efficiency benefits of allowing linking. Although efficiency and price discovery are both improved by allowing intermediation in linked permit markets, we find that further gains can be realized through direct firm to firm trading. Buyers in high cost regions and sellers in low cost regions benefit the greatest from linking.

AbstractThis paper reports a duopoly experiment in which sellers compete for a potentially patient buyer. Each period sellers simultaneously post prices and the buyer costlessly observes either one or both prices. The buyer can then either accept an observed price or reject all offers. Following a rejection, the sellers may have an opportunity to post prices again in another round. We study how the duopolists' pricing behavior responds to changes in the likelihood of the buyer observing multiple prices, γ, and the probability of continuing to another round, δ. The unique equilibrium features mixed strategies. Consistent with the equilibrium, observed average prices are decreasing in γ and δ. Contrary to equilibrium predictions, however, buyers sometimes reject profitable price offers and average prices decline in later rounds.

AbstractFirms often cooperate explicitly in certain interactions, such as research joint ventures, while competing in other markets. Cooperation in research and development can allow firms to internalize the external benefits of knowledge creation and increase the returns from R&D expenditures. Such cooperation may spill over to facilitate collusion in the market, however, potentially lowering welfare and efficiency. This paper uses a laboratory experiment to examine if sellers successfully coordinate to fund a joint research project to reduce their costs, and how this collaboration affects their pricing behaviour. The experiment includes control treatments with separate R&D cooperation and markets. Our results show that although subjects usually cooperate when given an opportunity, cooperation is less common when they also compete in the market. Communication between individuals improves cooperation in all environments, particularly when the market is present. Nevertheless, the data provide no evidence of seller collusion in the market.

Rich Communication, Social Preferences, and Coordinated Resistance against Divide-and-Conquer: A Laboratory Investigation

byTimothy N. CasonDepartment of EconomicsPurdue UniversityandVai-Lam MuiDepartment of EconomicsMonash University(Published in European Journal of Political Economy, 2015)Draft: October 2012

AbstractCoordinated resistance by citizens is key to deter leader transgression, and leaders often employ the divide-and-conquer strategy to prevent successful coordinated resistance. This paper presents a laboratory experiment to investigate how social preferences and computer-mediated free form communication (Rich Communication) can facilitate coordinated resistance. In our experiment, a leader first decides whether to extract surplus from a victim and shares it with a beneficiary. We provide direct statistical evidence that victims more quickly and vigorously engage in communication, urging the beneficiary to “be fair,” while beneficiaries propose to acquiesce more frequently. The successful joint resistance rate increases almost four-fold (from 15 to 58 percent) when moving from the more restrictive communication treatments to Rich Communication. We also find that the significant impacts of rich communication are driven more by the responders’ ability to engage in rich discussion rather than the multiple and iterative opportunities to indicate intentions.

AbstractThis paper presents an experimental study of two mechanisms that influence incentives to reduce emissions that increase ambient pollution levels. In the formal mechanism individuals face a penalty if the group generates total pollution that exceeds a specified target, whereas in the informal mechanism individuals can choose to incur costs to punish each other after observing their individual emissions. We examine the effectiveness of these mechanisms, in isolation and in combination. The results suggest that the formal targeting mechanism is significantly more effective than informal peer punishment in reducing pollution and increasing efficiency.

AbstractWe study auctions under different entry rules. In the field, individuals self-select into auctions and regulations often require them to meet specific qualifications. In this experiment we assess the role of voluntary entry and financial requirements on the incidence of severe overbidding and bankruptcies, which are widespread in common value auctions. We show that voluntary entry amplifies overbidding and increases bankruptcy rates. Qualified entry has only modest impacts on overbidding. This study adds new insights to existing experiments where all subjects are usually placed exogenously into auctions.

An Experimental Investigation of Hard and Soft Price Ceilings in Emissions Permit Markets

AbstractTradable emissions permits have been implemented to control pollution levels in various markets around the world and represent a major component of legislative efforts to control greenhouse gas (GHG) emissions in the United States. Because permits are supplied for a fixed level of pollution, allowing the market for permits to determine the price, there is a desire for price control mechanisms which would protect firms otherwise susceptible to price spikes caused by fluctuations in the demand for pollution abatement. We test permit markets in an experimental laboratory setting to determine the effectiveness of several price control mechanisms. Evidence suggests that both permit supply adjustments and traditional price ceilings (hard ceilings) effectively limit elevated prices in this setting. In contrast, reserve auctions (associated with soft ceiling designs) do not consistently control prices, especially when a minimum reserve permit price is applied. Of the two ceiling options, our results point towards a hard ceiling as the preferred mechanism for controlling short term price increases.

Promoting Cooperation in Nonlinear Social Dilemmas through Peer Punishment

AbstractMany social dilemma and public goods provision problems exhibit nonlinearities that lead to equilibrium outcomes in the interior of the choice space. Yet this environment has been ignored in most experimental studies of peer punishment. This paper examines the effectiveness of peer punishment in promoting socially efficient behavior in such nonlinear environments. We report results from a laboratory experiment comparing the impact of peer punishment in a linear public good game with two nonlinear social dilemma games: a piecewise linear public good game and a common pool resource game. We find that while peer punishment reduces free riding in these new environments, the impact of punishment is weaker and takes longer to be effective.

Cycles and Instability in a Rock-Paper-Scissors Population Game: a Continuous Time Experiment

AbstractWe report laboratory experiments that use new, visually oriented software to explore the dynamics of 3x3 games with intransitive best responses. Each moment, each player is matched against the entire population, here 8 human subjects. A ``heat map'' offers instantaneous feedback on current profit opportunities. In the continuous slow adjustment treatment, we see distinct cycles in the population mix. The cycle amplitude, frequency and direction are consistent with standard learning models. Cycles are more erratic and higher frequency in the instantaneous adjustment treatment. Control treatments (using simultaneous matching in discrete time) replicate previous results that exhibit weak or no cycles. Average play is approximated fairly well by Nash equilibrium, and an alternative point prediction, ``TASP'' (Time Average of the Shapley Polygon), captures some regularities that NE misses.

Misconceptions and Game Form Recognition: Challenges to Theories of Revealed Preference and Framing

byTimothy N. CasonDepartment of EconomicsPurdue UniversityandCharles PlottDivision of the Humanities and Social SciencesCalifornia Institute of Technology(Published in Journal of Political Economy, 2014)Draft: September 2012

AbstractThis study explores the tension between the standard economic theory of preference and non-standard theories of preference that are motivated by an underlying theory of framing. A simple experiment was performed to measure a known preference, the value of a card that can be exchanged for $2 cash. The measurement does not produce the known preference and instead reports a preference that has properties often cited in support of non-standard preference theories and framing. Close examination reveals that the divergence of the measured preference from the known preference reflects a mistake, arising from some subjects’ misconception of the game form. We conclude that choice data should not be granted an unqualified interpretation of preference revelation. Mistakes in choices obscured by a possible error at the foundations of the theory of framing, can masquerade as having been produced by non-standard preferences.

Swords without Covenants Do Not Lead to Self-Governance

byTimothy N. CasonDepartment of EconomicsPurdue UniversityandLata GangadharanDepartment of EconomicsMonash University(Published in the Journal of Theoretical Politics, 2015)Draft: May 2013

AbstractThis paper presents an experimental study of two mechanisms for managing common property resources. A decentralized peer punishment mechanism (swords) has been shown to increase cooperation in related social dilemmas, but only with linear private benefits and costs of public goods provision. We investigate the effectiveness of this mechanism for a more realistic nonlinear public goods environment, in isolation and in combination with nonbinding communication and informal agreements (covenants). The results show that swords do not increase cooperation or yield from the public resource, regardless of whether covenants are also possible. Covenants are significantly more effective in solving the social dilemma, and importantly peer punishment is unnecessary if communication is possible.

Prior Interaction, Identity, and Cooperation in the Inter-Group Prisoner’s Dilemma

AbstractCostly practices adopted by organizations and observations by researchers suggest a belief that prior interactions affect inter-group cooperation. This paper proposes an identity-based successful prior interaction hypothesis for the inter-group prisoner’s dilemma (IPD) as a microfoundation for this assertion. We develop a model of the IPD that incorporates group-contingent social preferences and bounded rationality to derive conditions under which an increase in pro-social concerns for the out-group will increase cooperation. We then report an experiment that shows that compared to the Baseline treatment in which two groups play a one-shot IPD, the play of a one-shot coordination game by members of the two groups prior to playing the IPD increases cooperation in the IPD from 8 to 42 percent. A post-experiment survey and chat coding results using a natural language classification game both show that successful prior interaction increases individuals’ concerns for their out-group.

AbstractWe report a laboratory experiment that investigates the impact of observational learning on bubble formation in asset markets with inexperienced and experienced traders. Some treatments employ pre-market training in which each participant is ‘matched’ with a trader from a different prior market and observes all trading details but does not directly participate in trading. We find that observational learning, similar to experience, significantly reduces mispricing in subsequent markets. This finding suggests that observation of prices is a key mechanism through which experience mitigates bubbles. We also vary whether transaction prices are displayed in a column of text or in a graphical display, and find that among inexperienced and once-experienced traders, markets with the tabular display result in bubbles that are greater in amplitude relative to markets with the graphical display.

Individual versus Group Play in the Repeated Coordinated Resistance Game

byTimothy N. CasonPurdue UniversityandVai-Lam MuiMonash University(Published in the Journal of Experimental Political Science, 2015)Draft: May 2014

AbstractThis paper reports an experiment to evaluate the effectiveness of repeated interactions in deterring leaders’ from using divide-and-conquer strategies to extract surplus from their subordinates, when every decision-maker involved is a group instead of an individual. We find that both the resistance rate by subordinates and the divide-and-conquer transgression rate by leaders are the same in the group and individual repeated coordinated resistance games with or without communication. Similar to the individual game, adding communication to the group game can help deter opportunistic behavior by the leaders even in the presence of repetition.

AbstractThis paper reports an experimental study of two stochastic audit schemes for enforcing regulatory compliance. In the Random Audit mechanism firms are randomly chosen for inspection. In the Tournament Audit mechanism the probability of inspection increases with the degree of estimated under-reporting. The experiment also varies the observability of identity, output, and compliance decisions. Optimal output is theoretically independent of the auditing schemes, but equilibrium reporting is higher under the Tournament mechanism than Random auditing. Experimental findings are consistent with the theoretical predictions for reporting, but not for output. In particular, we find that average output is lower and reporting is higher in the Tournament treatment compared to the Random Audit treatment. At the individual level, a majority of participants misreported in most periods. Social observability does not affect output or reporting significantly in either of the audit treatments.

AbstractThis study employs a laboratory experiment to assess the performance of tradable permit markets on dynamic efficiency arising from cost-reducing investment. The permit allocation rule is the main treatment variable, with permits being fully auctioned or grandfathered. The experimental results show significant investment under both allocation rules in the presence of ex ante uncertainty over the actual investment outcome. However, auctioning permits generally provides stronger incentives to invest in R&D, leading to greater dynamic efficiency compared to grandfathering.

AbstractCostless pre-play communication has been shown to effectively facilitate within-group coordination. However, in competitive coordination games, such as rent-seeking contests, better within-group coordination leads to more aggressive competition and lower efficiency. We report an experiment in which two groups compete in a weakest-link contest by expending costly efforts. We find that allowing within-group communication makes groups compete more aggressively. When only one group can communicate, the communicating group coordinates better and expends higher efforts than the non-communicating group. However, the communicating group earns payoffs that are not different from the baseline contest without any communication, while the non-communicating group earns lower payoffs than in this baseline contest. Allowing within-group communication in both groups leads to even more aggressive competition and the lowest payoffs to both groups. Despite such a “harmful” effect of communication, groups vote to endogenously open communication channels even though this leads to lower payoffs and efficiency.

Enhancing Fundraising with Refund Bonuses

byTimothy N. CasonPurdue UniversityandRobertas ZubrickasUniversity of Bath(Published in Games and Economic Behavior, 2017)Draft: February 2015

AbstractThe provision point mechanism as a method of funding threshold public goods is extended with refund bonuses. Each contributor not only has his contribution refunded in the case of insufficient contributions but also receives a refund bonus proportional to his proposed contribution. As long as the refund bonus pool does not exceed the net value of the public good, in equilibrium the public good is always provided and refund bonuses are never distributed. In this paper, we empirically investigate this extension of the provision point mechanism in a laboratory experiment by testing its properties on allocative and distributive efficiency, equilibrium coordination, and invariance to information distribution. Individuals respond to the incentives induced by refund bonuses as predicted, but systematic deviations exist that are consistent with quantal response equilibrium. Since this simple mechanism has considerable practical potential especially in crowdfunding, these promising initial results call for further experimental work.

bySimanti BanerjeeUniversity of Nebraska-LincolnTimothy N. CasonPurdue UniversityFrans P. de VriesUniversity of StirlingandNick HanleyUniversity of St. Andrews(Published in Journal of Environmental Economics and Management, 2017)Draft: February 2016

AbstractLandowner participation and spatial coordination of land use decisions are key components for enhancing the effective delivery of ecosystem services from private land. However, inducing landowner participation in Payment for Ecosystem Services schemes for coordinating land management choices is challenging from a policy design perspective owing to transaction costs associated with participation. This paper employs a laboratory experiment to investigate the impact of such costs on participation and land use in the context of an Agglomeration Bonus (AB) scheme. The AB creates a coordination game with multiple Nash equilibria relating to alternative spatially-coordinated land use patterns. The experiment varies transaction costs between two levels (high and low), which affects the risks and payoffs of coordinating on the different equilibria. Additionally, the possibility of communication is implemented between neighboring landowners arranged on a local network to facilitate spatial coordination. Results indicate a significant difference in participation under high and low transaction costs, with a lower uptake when transaction costs are high. This effect is, however, impacted by transaction costs faced in the past. Communication improves AB performance with the effect being greater for participants facing high transaction costs.

Bidding in First-Price and Second-Price Interdependent-Values Auctions: A Laboratory Experiment

AbstractWe report a laboratory experiment on first-price and second-price auctions in settings with independent signals and interdependent values. The environment includes independent private values and the common-value “wallet game” as limiting cases. We manipulate the degree of interdependence of values across sessions, while maintaining the same Bayes-Nash equilibrium bidding function. In contrast, cursed equilibrium predicts bids will be raised for lower signals. We find some support for cursed equilibrium, in that bids change as the degree of value interdependence changes. Contrary to both Bayes-Nash and cursed equilibrium, auction revenues are largest for intermediate levels of interdependence. We construct a model combining cursedness with an underweighting of the opportunity costs of higher bids, and find substantial bidder heterogeneity. A majority of bidders are either fully cursed and disregard completely the bad news that winning the auction entails, or are not cursed at all. We also find evidence for some systematic procedural differences in bidding between first-price and second-price auctions.

Individual versus Group Choices of Repeated Game Strategies: A Strategy Method Approach

AbstractWe study experimentally the indefinitely repeated and noisy prisoner's dilemma, in which random events can change an intended action to its opposite. We investigate whether groups use lenient or forgiving strategies more than individuals, and how decision-makers experiment with different strategies by letting them choose from an extensive list of repeated game strategies. We find that groups use forgiving and tit-for-tat strategies more than individuals. Always Defect, however, is the most popular strategy for both groups and individuals. Groups and individuals cooperate at similar rates overall, and they seldom experiment with different strategies in later supergames.

AbstractStudies of strategic sophistication in experimental normal form games commonly assume that subjectsí beliefs are consistent with independent choice. This paper examines whether beliefs are consistent with correlated choice. Players play a sequence of simple 2x2 normal form games with distinct opponents and no feedback. Another set of players, called predictors, report a likelihood ranking over possible outcomes. A substantial proportion of the reported rankings are consistent with the predictors believing that the choice of actions in the 2x2 game are correlated. The extent of correlation over action profiles vary systematically between the type of games (i.e., prisonerís dilemma, stag hunt, coordination, and strictly competitive) as well as the kind of payments within each type of game (i.e., high vs. low deviation payoffs and symmetric vs. asymmetric payoffs).

Subject Pools and Deception in Agricultural and Resource Economics Experiments

AbstractThe use of student subjects and deception in experiments are two controversial issues that often raise concerns among editors and reviewers, which might prevent quality research from being published in agricultural and resource economics (ARE) journals. We provide a self-contained methodological discussion of these issues. We argue that field professionals are the most appropriate subjects for questions related to policy or measurement, and students are the most appropriate subjects for scientific research questions closely tied to economic theory. Active deception, where subjects are provided with explicitly misleading information, has been avoided in the mainstream economics discipline because it can lead to a loss of experimental control, lead to subject selection bias, and impose negative externalities on other researchers. Disciplinary ARE journals may want to abide by these norms against deception to maintain credibility. Interdisciplinary ARE journals may have more flexibility, although it is important to provide guidelines to avoid too much reviewer-specific variation in standards. For ARE researchers, we suggest employing a deception-free experimental design whenever possible because we know of no field in which deception is encouraged.

AbstractWe study donation-based crowdfunding for threshold public good provision. Our main focus is on an extension with refund bonuses aimed at resolving the problems of equilibrium coordination and free riding. In the case of insufficient contributions, contributors not only have their contributions refunded but they also receive refund bonuses proportional to their pledged contributions. Thus, refund bonuses encourage more contributions but ultimately enough is raised given sufficient preference for the public good and in equilibrium no bonuses need to be paid. We test the predicted effects of refund bonuses in an experiment using a laboratory-based crowdfunding platform that features most main aspects of real-life platforms. Our main empirical result is that refund bonuses substantially increase the rate of funding success when contributors can support multiple projects. Furthermore, our findings also demonstrate that refund bonuses lead to significant economic gains even after accounting for their costs.

AbstractWe report a continuous time laboratory experiment studying the classic Burdett and Judd (1983) model, which features a unique Nash equilibrium (NE) that has dispersed prices. Adaptive dynamics predict that the NE is stable for one parameter set we use, and unstable for another parameter set. We find that time average dispersions are close to the NE distribution for the stable parameter set, but skew towards prices higher than NE for the unstable parameter set. We offer an empirical definition of price cycles in terms of changes over time in robust measures of central tendency (median) and dispersion (interquartile range). By that definition, the data exhibit persistent cycles in both treatments, with larger cycle amplitudes for the unstable parameters.

AbstractGroups such as committees or boards make many important decisions within organizations. Many of these decisions affect external parties. This paper uses a laboratory experiment to study how the gender composition of three-person groups affects choices and beliefs in a coordination game with selfish and prosocial equilibria. We find that women are more willing to choose the prosocial option. Both men and women believe that women will make choices that are kinder to external parties, in line with the observed difference in prosocial choices across genders. Analysis of the chat communications reveals that women express more concerns for others' welfare and mention money less often. These results have implications for public policies intended to increase gender diversity and women's representation on decision-making committees in the corporate sector, in politics, and in academia.